California LLC Explained

In the state of California when you file your LLC Articles of Organization this does not automatically separate you from your business and it does not automatically mean that you are able to use either S-Corp or C-Corp filing status for tax purposes, and the second important thing is that if you do not file your Ca. 568 tax return for any reason you still owe the $800.00 annual fee regardless of if you made money or not, and yes penalties and fees are assessed if you file late.

If you are just starting your business, you should read our Starting from Scratch article or for more detailed information, or you can purchase our guidebook Fundamental Basics in Starting a Business, because no matter what you are selling (Service or Product) there are rules and regulations if you want your business to be legitimate and to avoid any unnecessary fees or potentially be force to stop operation and shut your doors.

Now back to the LLC entity formation, if you are the sole owner of the business or single-member, when you file your articles of organization you are considered a Disregarded Entity, what does this mean, well it means that you are an individual filing as an LLC and have not elected to be taxed as a separate entity, basically you will still file Schedule C with your individual return and with your California return you will need to file form 568 in which you will pay your annual fee as of 2024 this fee is $800.00, this fee is the base for revenue less than $249,999, and then there is the revenue scale for revenue $250,000 and over. If there are 2 or more owners in the LLC you are automatically considered a Partnership meaning you will file form 1065 and California form 565. In either case you will need to “Elect” to be taxed as an S-Corp or C-Corp by filling the appropriate forms with the IRS. (more details later in the article)

California LLC Fee Revenue Scale November 2024

When you are first starting and don’t have a revenue stream sometimes it is best to wait until you are netting (profit) more than $125,000 a year and or if you have a high liability business in which you need to protect your personal assets. If you are a single member LLC you need to file Federal form 2553 and request to file as an S-Corp or Federal form 8832 for C-Corp, if you do not receive approval from the IRS, you cannot use either S or C Corp filing status, you will have to file as a disregarded entity or partnership. Please make sure you completely understand the liability with either filing status and follow the requirements and regulations.

If you file your returns using the incorrect form you will receive notice from the IRS which will request that you refile using the correct forms and yes they will assess penalties and fees, unless of course you are able to get your amend return in by April 15th, take note that most Tax Preparers and All CPA’s will charge you to refile if the incorrect form was used based on the information you provided.

Okay, differences between filing statuses of an LLC and a quick review on how they are taxed, read our article on Understanding how my Business is Taxed for more in-depth information.

Disregarded Entity: files using same method as a Sole-proprietor, Schedule C is used to report income and expenses on personal tax return and paid with submission of return. Difference: You will need to add California Form 568 to report income/expenses and pay your annual LLC Fee, with exception to initial filing. Every year after year one (1) when you file your 568 you will owe the $800.00 regardless of if you made money or not and or the appropriate fee associated with your net income (see California LLC Fee Revenue Scale above).

Partnership: files form1065 for federal and 565 for California for the Partnership each partner receives a K-1 for their percentage of the profits, which they will then report on their individual tax returns (Pass Through Entity). The company pays the annual fee to FTB, however, the majority of the tax liability is passed on to the partners. See our article on Partnerships Wage vs Distribution and the Associated Liability

S-Corp Entity: files form 1120s for federal and California100s to report income and expenses for the business and the members receive a K-1 for their percentage of the profits along with their reported distributions, if any member has “loaned” the company money it will also be present on the K-1 from. The K-1 is filed with the individual tax return (Pass Through Entity). The company pays the annual fee to FTB, however, the majority of the tax liability is passed on to the members.

C-Corp Entity: files form 1120 for federal and California 100 to report income and expenses for the business, the corporation pays any balance due to both Federal and State entities, there is no K-1 because the corporation is not a pass-through entity.

Dawn Pellinacci